Though the Netherlands was late to the game when it came to industrializing, its economy did already have certain traits that are associated with more modern economies, such as a large service sector, and a very productive agricultural sector. In 1800 43% of Dutch people were employed in agriculture, compared to 36% in GB and 62% in Germany, 26% were involved in industry (GB 30%, Germany 21%), and 31% were working in the service sector (GB 34%, Germany 17%). (Sources: De Vries & Van der Woude, 'The first modern economy'; Van Zanden, 'Taking the measure').

During the period between 1815 and 1830, investments in heavy industry grew. This trend was halted and reversed and until 1865 more traditional fields such as the textile industry, sugar trade and shipbuilding rose back to prominence. Only around 1870 did the Netherlands really start industrializing like the UK, Belgium, Germany and the United States had done.

'Why were the Netherlands so late?'

Many have argued that the Dutch were too focused on their glorious past and refused to let go of outdated technology, or that its focus on windmills and watermills to provide power had led it towards a technological dead-end.

Recent historians however, point out that the Netherlands never truly fell behind its neighbours economically, but rather that its economic profile was different from its industrialized neighbours, with a larger focus on services and agriculture.

GDP per capita in 1990 dollars:
1820 - Belgium 1319, Germany 1077, Netherlands 1838, UK 1706, US 1257.
1850 - Belgium 1847, Germany 1428, Netherlands 2371, UK 2330, US 1806.
1870 - Belgium 2692, Germany 1839, Netherlands 2757, UK 3190, US 2445.
1900 - Belgium 3731, Germany 2985, Netherlands 3424, UK 4492, US 4091.
1930 - Belgium 4979, Germany 3973, Netherlands 5603, UK 5441, US 6213.
Source: Maddison, 'Historical Statistics'.

Furthermore, the Netherlands did innovate its technology further throughout the early 19th century. On one hand through further improvements in its traditional technologies (such as windmills), but on the other hand through selectively taking foreign innovations and applying them on a small scale to Dutch production methods.

'Why didn't the Netherlands develop a modern industry earlier?'

- One reason that has been given is the country's republican history. As a Republic, Dutch cities had enjoyed various liberties and privileges. This decentralized system, which had allowed for a dynamic society in which various regions within the country competed economically, proved to be disadvantegeous in an age of increased centralization and integration into one national economy supported by a good infrastructure. Local interests and power struggles inhibited a quick Dutch conversion to this new nationalized model. Increased taxes that were aimed towards building a national infrastructure further inhibited risk-taking by businesses and left the country with relatively high national debt.

- Another reason was the country's first King, Willem I (r. 1815-1840). Often called 'Koopman-koning' (Merchant-king) by his own people, Willem I attempted to modernize his country's economy through large investments into infrastructure, industry, and trade. Like stated in the previous paragraph, these taxes had the opposite effect of what he had intented, causing Dutch business owners to shy away from investing while the country's finances were in chaos.

- A final factor that inhibited the development of a Dutch industrial base was the liberalization of international trade in the 1840s. When a liberal party rose to power in 1842, they abolished most tariffs on imports and exports. This was good for the modernized Dutch agricultural sector, but had a large impact on Dutch craftsmen, who couldn't keep up with much more modernized foreign manufacturers.

To conclude, the Dutch economy was more heavily focused on the service sector and agriculture, rather than industry. So rather than competing with Belgium, Germany, and the UK on an industrial level, the country specialized in other fields.

Source: Touwen, Jeroen 'Expansie, stagnatie en globalisering: economische ontwikkelingen' in eds. Davids, Karel & 'T Hart, Marjolein De Wereld & Nederland. Een sociale en economische geschiedenis van de laatste duizend jaar, Amsterdam, 2011, 185-200.

A debt crisis spurred by four military catastrophes, followed by an eventual recovery once the debt was paid.

The great irony of the Netherlands’ slow industrialization is that the Dutch Republic had laid the institutional groundwork for industrialization in Britain. In many ways, the “industrial” revolution was a financial one - many technologies and manufacturing processes used in the early period of industrialization had already been practiced for centuries, but the capital was never there to employ them on a large scale. This was because there was no reliable way for many savers to pool their money into a single fund. Until the consolidation of the Dutch banking system in the 18th century, saving in a bank was a risky proposition, akin to playing the stock market today. Sovereign default was a regular occurrence in the early modern period: King Phillip of Spain, who presided over the Christian world’s largest state budget in his time, defaulted four times during his reign. He was far from alone, as the Netherlands’ commercial rival, England, had to resort to a policy of “forced loans” (taxes in all but name) due to the King’s poor reputation as a debtor.

The Dutch Republic borrowed extensively for most of its history, but was relatively accountable to its creditors. Since the government during most periods was influenced by the mercantile classes, default was generally not an option. This led to the world’s first stable banking system - banks could “hedge” reserves on state loans, knowing they would be repaid. This in turn made saving a routine activity, leading to significant “capital formation” for the first time.

For most of human history, GDP per capita growth was net zero, since the rate of capital growth never exceeded the rate of population growth for long periods. Pooled savings are what enabled industrialization, spurred by higher rates of investment. The Dutch Republic in the 17th and early 18th centuries saw comparatively fast economic growth which some historians call “Dutch proto-industrialization”. Manufacturing processes were employed in shipbuilding, and to a limited extent in textiles, and many infrastructures were built.

Ironically, it was these very institutions that enabled English industrialization. In 1688, Dutch stadtholder William of Orange usurped the English throne, and reformed the government on parliamentary lines. In 1694, England created the Bank of England, in practice a regulatory organization on crown debt. This led to the English public debt becoming as secure as the Dutch, and led to the creation of a relatively stable banking system in the UK.

The Dutch economy would ultimately be ruined by the country’s foreign policy. In 1674, a conspiracy organized by Louis XIV of France united France, Spain, and England against the Dutch Republic. Conversely, Dutch Grand Pensionary de Witt, fearing the army, which supported his rivals in the House of Orange, underfunded the force. The resulting military catastrophe was known as “Rampjaar”, or disaster year. The Republic ultimately survived this crisis, but only after a multiplication of the public debt. This was only worsened by the subsequent Glorious Revolution, which magnified the personal power of William of Orange but turned the Dutch Republic into England’s “whipping boy” on the continent. The Dutch foreign policy became tied to that of England (Britain after 1707), and the two entered the War of Austrian Succession together. Since the Dutch Republic was on the continent and Britain was not, this led the Dutch to be punished for Britain’s decisions, receiving the bulk of the French army’s “attention”. By the mid 18th century, the Dutch state was already nearing bankruptcy from war expenses, and 70% of the state budget was being dedicated to debt repayment. Massive state borrowing also dried up the supply of credit, making it harder for businesses to get loans. This situation would only worsen over the following seventy years.

After the War of Austrian Succession, the Republic adopted a brief policy of neutrality (while still being favorable to the British) for the following three decades in order to recuperate financial losses. Financial strain and neutrality led the Dutch army and fleet to atrophy. This set the Republic up for its third military catastrophe, one arguably worse than the partial French occupation and Rampjaar. In the late 1770s, the outbreak of the American Revolutionary War drove a wedge beteeen the Dutch and their erstwhile British allies. The British government, expecting routine subservience from the Dutch, demanded limited military support and a cessation of trade with France and the American rebels. The Dutch refused, partly due to idelogical sympathy with the rebels, and partially because Stadtholder William V couldn’t have agreed if he wanted to. Already accused of mismanagement, William faced a growing pro-French opposition and his government was mired with infighting.

The British declared war in 1780, after the Dutch joined Catherine the Great’s “League of Armed Neutrality”. The Fourth Anglo-Dutch War was an unmitigated disaster. The Republic was blockaded and the Dutch East India Company went insolvent, requiring an expensive bailout.

The final catastrophe came only 11 years after the war’s end in 1784. The French Revolution broke out later in the decade, and in 1795 the Revolutionary armies conquered the country, establishing the puppet Batavian Republic. The French, over the course of their almost two decades long occupation, extracted a sum from the Dutch in requisitions and indemnity approaching 90% of GDP. For the first time, the Dutch state became insolvent and could not service its debt. The British meanwhile helped themselves to numerous Dutch colonies during this period, most notably the future South Africa.

Belgium and the Netherlands started to diverge almost immediately after Belgian independence in 1830. The Netherlands until the mid-1850 would still be struggling to make payments on its debt from the Republic (despite much negotiation and selective defaults), while Belgium, free of this burden, funded a vast railroad system in the first years of its independence. Belgium was, from the start, somewhat of a French project, and had ready access to French loans. Further, the Wallonia region of Belgium had rich coal reserves close to the surface which could be mined at a low cost - this gave Belgium a considerable advantage in industrialization.

After the settlement of the debt issue, Dutch growth rebounded and eventually converged with Belgium’s. There wasn’t much of a “how” here - the Dutch were the first to have the critical ingredient in industrialization - a reliable banking system - and underwent “proto industrialization” in the 17th century that made them the richest country in the world in per capita terms. The Netherlands wasn’t “held back” by institutional barriers like many countries in the time period- instead, it had all the ingredients, but suffered a “lost century” from costly foreign policy disasters which spawned a financial crisis of titanic proportions.

Critically, the Netherlands was never a “poor” country. Since independence, it has always been one of the richest in GDP per capita in the world (though the gap between rich and poor countries has expanded from industrialization and modern growth). However, its long stagnation was a result of much of the capital formed in the country in the 18th and early 19th centuries going to war, debt service, or “indemnity” to France.

This all begs the question as to why Britain didn’t go through the same crisis, and the answer lies in “extractive capital formation”. Britain, also benefiting from a stable banking system (thus, low interest rates), borrowed deeply into debt to defeat the more populous France, so much so that debt to GDP exceeded 200% at the end of the Napoleonic Wars. However, interest rates were sub-4% for most of this period, meaning that Britain’s interest payments as percent of GDP were not considerably higher than the Dutch Republic’s for most of the 18th century. More importantly, Britain also extracted vast amounts of money from colonized nations and European rivals during this period. The British Empire expanded rapidly in the 18th century, and British victories produced trade concessions abroad (such as the notorious asiento), a mountain of seized cargo, and indemnity payments. In contrast, the Dutch Empire was contracting for most of this period - its chief losses being to its British “ally” - and its most valuable colony went insolvent in the 1780s.

Sources:

de Vries and Woude. The First Modern Economy. Success, Failure, and Perseverance of the Dutch Economy, 1500–1815.

Moore, Bob. Colonial Empires Compared: Britain and the Netherlands, 1750–1850.

Baten, Jörg. A History of the Global Economy. From 1500 to Present.

Mokyr, Joel. The Industrial Revolution and the Netherlands: Why did it not happen?

North and Weingast. Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England.

Follow up question: how did the Netherlands, with their naval experience and sizable colonial holdings in the Farr East, almost totally miss out on the carving up of Africa? Belgium was smaller, but had the whole of the Congo practically to itself (with predictably disastrous results for the locals). Did Belgium have a larger industry to feed with African resources, or was it more that the Dutch were too busy managing their other holdings?